Going, Going, Gone

John Harwood wonders where all the jobs went?

Unemployment began rising steadily as Mr. Obama, then a senator, wrapped up the Democratic presidential nomination in 2008. That May, the jobless rate increased to 5.4 percent; by December it reached 7.4 percent.

In January 2009, Mr. Obama’s economic advisers predicted that unemployment would peak around 8 percent if Congress passed their recommended stimulus program. As Republicans never tire of pointing out now, the rate hit 10.1 percent by October and has fallen less than one percentage point since.

In part, the White House responds, that’s because contraction of economic output was much larger than expected. Yet the rise in unemployment far exceeded what economists would have forecast even had they known that. Under Okun’s Law, a formula for the relationship between output and unemployment described by the 1960s-era White House economist Arthur Okun, the jobless rate at the end of 2009 would have been around 8.3 percent instead of 10 percent.

“I don’t blame the administration for being off in these forecasts,” said R. Glenn Hubbard, dean of the Columbia Business School and chairman of the Council of Economic Advisers under President George W. Bush. He called the rise in unemployment “a mystery.”

Christina Romer, who leads the council now for Mr. Obama, said, “We’ve done a lot of things to look at possible explanations.”

Analysts looked into whether the troubled housing market created “job-lock” by preventing potential employees from selling homes and moving toward new opportunities. They also considered whether extended unemployment benefits deterred others from going back to work. But they concluded that such factors couldn’t explain the magnitude of job losses.

Instead, their analysis pointed toward the effect of the financial crisis on business owners who reacted to the fear and uncertainty by laying off employees in extraordinary numbers.

That’s a longer quote than I generally make but I thought the length was necessary to make the underlying concepts comprehensible.

I’ve reflected on this situation recently here. There’s yet another potential explanation that I think may be worth considering. One way of looking at how enterprises large and small do things is by distinguish between line jobs and staff jobs. Line jobs are those involved directly in the production of goods and services for sale. Examples of line jobs are not just people who work on production lines but their also supervisors and managers. People who work in “back office” jobs including bookkeeping, information technology (unless the enterprise is an information technology firm), many engineering jobs, and so on have staff jobs.

In the late 1970s and, increasingly, in the 1980s once China had abandoned its decades old policy of autarky, an enormous number of line jobs have been lost in the United States. This has occurred through a combination of off-shoring and increased productivity due to technology. We’ve been losing line jobs for decades.

That transition has resulted in a change in what American companies do. In 1980 most of my clients were manufacturers. After 1990 none of them were. Most of my clients now are in various different kinds of service businesses.

During the 1990s as a consequence of the growth of telecommunications in various forms and especially the Internet hundred of thousands, perhaps even millions of staff jobs have been off-shored to Ireland, India, and elsewhere as American companies sought to cut costs by reducing payrolls.

Since 2000 the only areas that have seen robust job growth are the sectors that have been subsidized: construction, finance, healthcare, education, government.

Every large enterprise either includes or is a bureaucracy. It’s the only way we have of organizing large enterprises. There’s an old adage in business: big businesses like to do business with big businesses. It’s equally true that big government and big labor prefer big businesses. Consequently, a considerable amount of policy is targeted specifically at fostering big businesses and politicians frequently think of the injury the policies may do to small businesses either as good riddance to bad rubbish or collateral damage. You can’t make an omelet without breaking eggs, can you?

Bureaucracies grow. That is their nature. Influence, status, and compensation in a bureaucracy are determined by how many people report to you which means that the ambitious bureaucrat will try to increase the number of his underlings regardless of the effect that might have on the core business and its mission. Staffs grow even as line operations shrink. What we may be seeing now is the pruning of these bureaucracies in response to the financial crisis and its attendant economic downturn.

If that’s the case, it’s hard to see how even a Depression era-style government employment program as suggested by Alan Blinder can work. You can have a WPA for construction workers or assembly line workers or even writers. It’s a lot harder to imagine a WPA or CCC for administrative assistants that passes the laugh test.